Nov. 6 (Bloomberg) -- Banco do Brasil SA is trading above
analysts’ target price for the first time in four years amid
speculation the bank, Latin America’s biggest by assets, is
planning an initial public offering for its credit-card unit.

Banco do Brasil surged 33 percent in the past three months
to 29.46 reais in Sao Paulo yesterday, rising above the 28.84-real average 12-month target price of 22 analysts surveyed by
Bloomberg. The Brasilia-based lender trades at 1.4 times its
book value, compared with 2.1 for Itau Unibanco Holding SA, the
smallest gap in more than a year. “Solid” profit and IPO
speculation are helping narrow the spread, said Joao Pedro
Brugger, a portfolio manager at Leme Investimentos.

“There’s a perception that the stock is undervalued,”
said Audrey Kaplan, head of international equities for Federated
Investors Inc., which manages about $377 billion in assets
including Banco do Brasil shares. “There’s a lot of hidden
value there,” Kaplan said in a phone interview from New York.
“I still see an upside.”

Banco do Brasil held the world’s largest initial offering
of 2013 in April, an 11.5 billion reais ($5 billion) transaction
for its BB Seguridade SA insurance unit. The lender is the best
performer among banks on the Ibovespa benchmark index since Oct.
17, when Boris Molina, a New York-based analyst at Banco
Santander SA, changed his recommendation to buy from the
equivalent of sell, saying odds of an IPO for the BB Cartoes
card business are about 50 percent.

Card Consideration

Banco do Brasil Chief Financial Officer Ivan Monteiro
denied last month that the bank is considering an IPO for the
credit-card unit or any other businesses. The bank declined to
make further comments, according to a press official.

Santander set a 31.24-real price target for December 2014.
Banco do Brasil is the only bank on the 72-company Ibovespa
benchmark index trading above analysts’ target price.

Santander’s analysts declined to make further comments on
their report, according to a press official.

“Rumors of IPOs for other Banco do Brasil units, such as
the card business, have been growing since the IPO of BB
Seguridade,” Leme’s Brugger said today in a telephone interview
from Florianopolis, Brazil. “I don’t know what the chances are
of a credit-card unit IPO, but it would be as successful as the
BB Seguridade offering.”

Banco do Brasil is also benefiting as foreign investors
boosted their stake in the bank to 19.4 percent in June from
17.5 percent a year earlier.

Last month, Banco do Brasil received authorization from the
government to increase the maximum allowable foreign ownership
to 30 percent from 20 percent. The last time Banco do Brasil
traded above its target price was in October 2009, one month
after the government allowed international investors to hold as
much as 20 percent of the bank’s shares, up from a previous 12.5
percent limit.

Profit Estimates

While non-state-owned banks Itau and Banco Bradesco SA are
restricting credit and posting record profits, federally
controlled lenders Banco do Brasil and Caixa Economica Federal
are boosting lending under pressure from the government to
support a cooling economy. Analysts expect Banco do Brasil to
post its smallest profit in more than three years after it
reduced interest rates charged to clients following requests
from President Dilma Rousseff.

That sort of political influence makes the bank’s shares
“very cheap,” and explains why they trade at a discount to
Itau and Bradesco, said Nick Robinson, head of Brazilian
equities at U.K.-based Aberdeen Asset Management, which oversees
about $15 billion of Latin American stocks, including Itau and
Bradesco.

Banco do Brasil, which is about 59 percent owned by the
federal government, has historically traded at a discount
relative to peers because of political risk. The bank traded at
an average price-to-book ratio of 1.5 in the past five years,
which compares with an average of 2.5 for Itau and 2.3 for
Bradesco, data compiled by Bloomberg show.

Officials at Itau and Bradesco declined to comment.

Management Stability

“Being a state-controlled bank, Banco do Brasil may not be
run in the interest of shareholders,” Robinson said in a
telephone interview, adding Aberdeen doesn’t invest in the
company because of the political risk. “I think there is no
stability in the management team.”

Banco do Brasil declined to comment on state control, as
it’s in a so-called “quiet period” before earnings are
released next week.

The company’s adjusted net income will probably drop to
2.49 billion reais in the third quarter from 2.66 billion a year
earlier, according to eight analysts surveyed by Bloomberg.

Banco do Brasil carries the risk of political
“interference,” including the appointment of a chief executive
officer by the government, said Gerardo Zamorano, San Diego-based investment director at Brandes Investment Partners LP.
Still, the IPO of BB Seguridade and the potential sale of the
credit-card business are signals “there is value in the bank
that is not fully realized,” he said.

Brandes has been a shareholder of Banco do Brasil since
2009, and is still purchasing the bank’s shares as it invests in
undervalued companies, he said.

The insurance unit’s IPO “helps crystallize the hidden
value in Banco do Brasil,” Zamorano said. “It helped the
market realize there’s value there, and before it wasn’t
appreciated as much.”